Foreign Direct Foreign Direct InvestmentInvestment

A Prerequisite to Economic A Prerequisite to Economic Growth?Growth?

““Comparative Examples” Comparative Examples”

vs. vs.

“Set Thesis”“Set Thesis”

Foreign Direct InvestmentForeign Direct Investment Foreign investmentForeign investment that establishes a lasting interest in or that establishes a lasting interest in or

effective management control over an enterprise. Foreign effective management control over an enterprise. Foreign direct investment can include buying shares of an direct investment can include buying shares of an enterprise in another country, reinvesting earnings of a enterprise in another country, reinvesting earnings of a foreign- owned enterprise in the country where it is located, foreign- owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates. and parent firms extending loans to their foreign affiliates. International Monetary Fund (IMF)International Monetary Fund (IMF) guidelines consider an guidelines consider an investment to be a foreign direct investment if it accounts investment to be a foreign direct investment if it accounts for at least 10 percent of the foreign firm's voting stock of for at least 10 percent of the foreign firm's voting stock of shares. However, many countries set a higher threshold shares. However, many countries set a higher threshold because 10 percent is often not enough to establish because 10 percent is often not enough to establish effective management control of a company or effective management control of a company or demonstrate an investor's lasting interest. demonstrate an investor's lasting interest.

– http://http://www.worldbank.org/depwebwww.worldbank.org/depweb// english/beyond/global/glossary. html english/beyond/global/glossary. html

Economic GrowthEconomic Growth Quantitative change or expansion in a country's economy. Quantitative change or expansion in a country's economy.

Economic growth is conventionally measured as the Economic growth is conventionally measured as the percentage increase in percentage increase in gross domestic product (GDP)gross domestic product (GDP) or or gross national product (GNP)gross national product (GNP) during one year. Economic during one year. Economic growth comes in two forms: an economy can either grow growth comes in two forms: an economy can either grow "extensively" by using more resources (such as "extensively" by using more resources (such as physicalphysical, , humanhuman, or , or natural capitalnatural capital) or "intensively" by using the ) or "intensively" by using the same amount of resources more efficiently (productively). same amount of resources more efficiently (productively). When economic growth is achieved by using more labor, it When economic growth is achieved by using more labor, it does not result in per capita income growth (see does not result in per capita income growth (see Chapter 4Chapter 4). But when economic growth is achieved through more ). But when economic growth is achieved through more productive use of all resources, including labor, it results in productive use of all resources, including labor, it results in higher per capita income and improvement in people's higher per capita income and improvement in people's average average standard of livingstandard of living. Intensive economic growth . Intensive economic growth requires requires economic developmenteconomic development..

– http://www.worldbank.org/depweb/http://www.worldbank.org/depweb/ english/beyond/global/glossary. html english/beyond/global/glossary. html

Trends in FDITrends in FDIFlow and stock increased in the last 20 yearsFlow and stock increased in the last 20 yearsIn spite of decline of trade barriers, FDI has In spite of decline of trade barriers, FDI has

grown more rapidly than world trade becausegrown more rapidly than world trade because– Businesses fear protectionist pressuresBusinesses fear protectionist pressures– FDI is seen a a way of circumventing trade FDI is seen a a way of circumventing trade

barriersbarriers– Dramatic political and economic changes in Dramatic political and economic changes in

many parts of the worldmany parts of the world– Globalization of the world economy has raised the Globalization of the world economy has raised the

vision of firms who now see the entire world as vision of firms who now see the entire world as their markettheir market

The Direction of FDIThe Direction of FDIHistorically, most FDI has been directed at the developed Historically, most FDI has been directed at the developed

nations of the world as firms based in advanced countries nations of the world as firms based in advanced countries invested in other marketsinvested in other markets

– The US has been the favorite target for FDI inflowsThe US has been the favorite target for FDI inflows

While developed nations still account for the largest share While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increasedof FDI inflows, FDI into developing nations has increased

– Most recent inflows into developing nations have been targeted at Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asiathe emerging economies of South, East, and Southeast Asia

FDI Flow by RegionFDI Flow by Region

Does Fact = Theory?Does Fact = Theory?

Gross fixed capital formationGross fixed capital formation summarizes the summarizes the total amount of capital invested in factories, total amount of capital invested in factories, stores, office buildings, etc.stores, office buildings, etc.

SO…SO…– This makes FDI a crucial determinant factor This makes FDI a crucial determinant factor

of increased future growth rate of an of increased future growth rate of an economyeconomy

……RIGHT???RIGHT???

Costs of FDI to Host CountriesCosts of FDI to Host CountriesAdverse effects on competitionAdverse effects on competition

Adverse effects on the balance of paymentsAdverse effects on the balance of payments– After the initial capital inflow there is normally a After the initial capital inflow there is normally a

subsequent outflow of earningssubsequent outflow of earnings– Foreign subsidiaries could import a substantial number of Foreign subsidiaries could import a substantial number of

inputsinputs

National sovereignty and autonomyNational sovereignty and autonomy– Some host governments worry that FDI is accompanied Some host governments worry that FDI is accompanied

by some loss of economic independence resulting in the by some loss of economic independence resulting in the host country’s economy being controlled by a foreign host country’s economy being controlled by a foreign

corporationcorporation

Political Ideology and FDIPolitical Ideology and FDI

RadicalView

PragmaticNationalism

FreeMarket

Political Ideology & FDIPolitical Ideology & FDI

The Radical ViewThe Radical ViewMarxist view: MNE’s exploit less-Marxist view: MNE’s exploit less-developed host countriesdeveloped host countries–Extract profitsExtract profits–Give nothing of value in exchangeGive nothing of value in exchange– Instrument of domination, not Instrument of domination, not developmentdevelopment

–Keep less-developed countries relatively Keep less-developed countries relatively backward and dependent on capitalist backward and dependent on capitalist nations for investment, jobs, and nations for investment, jobs, and technologytechnology

The Radical ViewThe Radical View

By the end of the 1980s radical By the end of the 1980s radical view was in retreatview was in retreat– Collapse of communism Collapse of communism – Bad economic performance of countries Bad economic performance of countries

that embraced the radical viewthat embraced the radical view– Strong economic performance of Strong economic performance of

countries who embraced capitalism countries who embraced capitalism rather than the radical viewrather than the radical view

The Free Market ViewThe Free Market View

Nations specialize in goods and services Nations specialize in goods and services that they can produce most efficientlythat they can produce most efficiently

Resource transfers benefit and strengthen Resource transfers benefit and strengthen the host countrythe host country

Positive changes in laws and growth of Positive changes in laws and growth of bilateral agreements attest to strength of bilateral agreements attest to strength of free market viewfree market view

All countries impose some restrictions on All countries impose some restrictions on FDIFDI

Trinidad and Tobago, a recipient of Trinidad and Tobago, a recipient of substantial FDI inflows in its natural gas substantial FDI inflows in its natural gas

http://ideas.repec.org/p/dgr/unuint/200307.htmlhttp://ideas.repec.org/p/dgr/unuint/200307.html Lou Anne A. BarclayLou Anne A. Barclay

– FDI inflows in its natural gas industry for the last FDI inflows in its natural gas industry for the last decade decade

– FDI-assisted development only occurs when FDI-assisted development only occurs when governments in less-developed economies pursue governments in less-developed economies pursue credible, selective intervention policies credible, selective intervention policies

Pragmatic NationalismPragmatic Nationalism

FDI has benefits and costsFDI has benefits and costsAllow FDI if benefits outweigh Allow FDI if benefits outweigh costscosts– Block FDI that harms indigenous industryBlock FDI that harms indigenous industry– Court FDI that is in national interestCourt FDI that is in national interest

Tax breaksTax breaksSubsidiesSubsidies

REGIONAL DEVELOPMENT REGIONAL DEVELOPMENT IMPLICATIONS OF FDIIMPLICATIONS OF FDI

Post Communist Eastern Europe, e.g. Post Communist Eastern Europe, e.g. Czech Automotive ComponentsCzech Automotive Components

Foreign direct investment (FDI) has been accorded a central role Foreign direct investment (FDI) has been accorded a central role in the post-communist economic transformation of Central and in the post-communist economic transformation of Central and Eastern Europe. Eastern Europe.

Regional effects of FDI in Central Europe (Czech Republic, Regional effects of FDI in Central Europe (Czech Republic, Hungary, Poland and Slovakia) in the 1990s. Hungary, Poland and Slovakia) in the 1990s.

Defining FDI’s role in regional economic transformationsDefining FDI’s role in regional economic transformations– Intensification of Uneven DevelopmentIntensification of Uneven Development– Development of a Dual EconomyDevelopment of a Dual Economy– Failure to Develop Linkages with Local and Regional EconomiesFailure to Develop Linkages with Local and Regional Economies– Contributionto Increased Regional Economic InstabilityContributionto Increased Regional Economic Instability

– Petr Pavlínek Petr Pavlínek – http://eur.sagepub.com/cgi/reprint/11/1/47.pdf#search=%22FDI-Economichttp://eur.sagepub.com/cgi/reprint/11/1/47.pdf#search=%22FDI-Economic

%20Development%22%20Development%22

Legal Institutions and FDILegal Institutions and FDI

Debate over relationship between legal Debate over relationship between legal institutions and foreign investment flowsinstitutions and foreign investment flows– Traditional/orthodox view: legal institutions play a Traditional/orthodox view: legal institutions play a

crucial role in the process of market-oriented crucial role in the process of market-oriented developmentdevelopment

by protecting private rights, especially the property by protecting private rights, especially the property and contract rights of foreign investorsand contract rights of foreign investors

By creating the legal foundations for market-oriented By creating the legal foundations for market-oriented reformreform

GOALSGOALS : : Investor experience suggests that:Investor experience suggests that:

A conventional program of market-oriented legal reform is A conventional program of market-oriented legal reform is NOT a prerequisite for foreign investmentNOT a prerequisite for foreign investment

– Try to Identify Why!Try to Identify Why!

Legal institutions play a small, if any, role in determining Legal institutions play a small, if any, role in determining the initial decision to investthe initial decision to invest

– WHY???WHY???

The form and content of useful law, as well as the The form and content of useful law, as well as the significance of law generally, seem to depends on the significance of law generally, seem to depends on the details of the project and the settingdetails of the project and the setting

– What are the constants that can be identified in What are the constants that can be identified in “Success stories?”“Success stories?”